Despite the disheartened mood surrounding COP26, a positive has emerged, the formation of the new International Sustainability Standards Board (ISSB). As of yet, there is no single standard on ESG, and the ISSB aims to address this challenge.
The outcomes from COP26—a defining make-or-break moment for climate action—have been received with mixed reactions. Well-known climate activist Greta Thunberg branded COP26 as a “failure” and an exercise in greenwashing, and COP26 president Alok Sharma stated that China and India will have to explain themselves to climate-vulnerable countries after they negotiated a watered-down agreement at the eleventh hour.
Fragmented standards, fragmented data
Investors are incorporating ESG considerations into their investments, therefore requiring high-quality ESG data. Corporate disclosure on ESG issues is far more extensive than it has ever been, but it is not uniform. Over the past few decades, there has been a sustained effort to force greater disclosure of climate-related information and persuade companies that disclosure is in their best interest. This resulted in the development of multiple disclosure frameworks and fragmented reporting standards.
There have been efforts to develop a single global reporting standard. For instance, BlackRock—the world’s largest asset manager—has urged companies to disclose in line with the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD). The Group of Seven (G7) will also mandate climate reporting in line with TCFD.
The announcement of the ISSB is a step in the right direction. Its parent organization, the International Financial Reporting Standards (IFRS) Foundation, governs how financial reporting is conducted in 166 countries. Applying the structure and uniformity of financial reporting has long been hailed as the solution to the ESG reporting challenges.
By June 2022, the ISSB will consolidate with the Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF), which was formed earlier in 2021 after a merger between the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB).
The United States could be a roadblock to ISSB success
The objections of the US Securities and Exchange Commission center around the argument that strong financial reporting standards are the bedrock of our capital markets. The US urges the IFRS Foundation not to venture into sustainability standard-setting because doing so would improperly equate sustainability standards with financial reporting standards, undermine the Foundation’s current important investor-centered work, and raise serious governance concerns.
The same dynamics that drove frameworks like SASB and TCFD to the top of the pile will determine the success of the ISSB. Despite objections from the US, the Group of Twenty (G20) has expressed its support of the ISSB and the development of a baseline global reporting standard.